KANSAS CITY SOUTHERN RAILWAY CO. v. KOELLER (July 27, 2011)

The Sny Island Levee Drainage District has operated a levee and drainage system in central Illinois for over 100 years. The system is designed to protect a 114,000-acre area from Mississippi River flooding. Over 99% of the affected area is agricultural. The rest is residential, commercial, utility, and railroads. The Kansas City Southern Railway Co. and the Norfolk Southern Railway Co. (the "Railroads") own a combined 355 acres. For decades, the District has funded its operations by assessing a per-acre fee for each landowner in the area. For the last 20 years, the fee has been $8.50 an acre. The District found itself in a precarious financial position after it experienced severe flooding in 2008 and a substantial increase in diesel fuel prices. The Commissioners decided they needed a $10 per acre fee increase. They also decided to stop charging the fee on a uniform basis. They decided pipelines, railroads, and utilities were under assessed. They hired an expert in flood protection projects and asked him to calculate the benefits for the non-agricultural properties. The expert did the analysis but he was short on hard data and used questionable methodologies. When the analysis resulted in a number that the Commissioners could not support, they "refined" the numbers. As a result, the assessments for the railroads increased by 4800-8300%. The Commissioners also exempted land within the municipalities, under the supposition that the cost of collecting the small assessments outweigh the benefits. Then they assumed that all the commercial and industrial properties other than the railroads, pipelines, and utilities were within municipal limits. The Commissioners filed a petition for authorization with the County Court, published notices in the local newspapers, and sent notices to landowners. The notice referred to a $10.00 increase per acre but did not mention the benefit-based assessments for railroads, pipelines, and utilities or the exemption for land within municipalities. The Railroads did not object and the court certified the assessment. When they first received their new assessments, the Railroads filed suit under the Railroad Revitalization and Regulatory Reform Act, which prohibits discriminatory taxes against railroads. The District moved to dismiss on Rooker-Feldmangrounds. Judge Scott (C.D. Ill.) denied the Rooker-Feldman motion and ruled that the assessment was a tax under the Act. She denied the preliminary injunction, however, because the Railroads did not submit evidence that their lands’ assessed value exceeded its true market value by 5%. After a bench trial, the court found in favor of the District, again because of the Railroads' failure to submit evidence of their lands' true market value. The Railroads appeal.

In their opinion, Seventh Circuit Judges Bauer, Wood, and Williams reversed and remanded. The Court first rejected the Rooker-Feldman argument. The doctrine only applies to state court "losers." The Railroads were not even present for, much less parties in, the state court proceedings. There is no judgment against them. Furthermore, they are not seeking a review of the state court order. They are asserting an independent federal cause of action under the Act. Two questions were presented to the Court on the merits: whether the assessment was "another tax" under the Act and, if so, whether the tax was an impermissible discrimination. With respect to the first, the Court looked to the statute, the Supreme Court, its own jurisprudence, and its sister circuits' interpretations to conclude that the assessment was a tax. It raises general revenues for use by the entire District. It is not tied to any specific project or landowner. The Court turned to whether it was discriminatory. It first had to decide who to compare the Railroads to: all property owners, other commercial and industrial property owners, or the Railroad's competitors. It recognized that the three other subsections of the section of the Act at issue dealt with different types of taxes but included reference to commercial and industrial taxpayers. Given that the fourth subsection addressed the same kinds of discrimination, the Court concluded the appropriate comparator group is the other commercial and industrial taxpayers. Since the Act does not define discrimination, the Court adopted the ordinary meaning of the word -- a failure to treat persons equally without reasonable distinction. Here, the record establishes that the Commissioners adopted a proportionately heavier tax on the Railroads. The Court cited the "inadvertent" exemption for the properties outside the municipal boundaries, the exemption for the commercial and industrial properties within the municipality, and the questionable methodology. In addressing the appropriate remedy, the Court noted that the Act provides an exemption to the Tax Injunction Act. Notwithstanding the exemption, however, the Court noted that a federal court should act with restraint in such matters. Therefore, an injunction should not enjoin the entire scheme but should eliminate the discriminatory effects by enjoining the 2009 recalculation and allowing the District another shot at a non-discriminatory assessment.